The Dynamic (In)efficiency of Monetary Policy by Committee

Riboni, Alessandro; Ruge-Murcia, Francesco

Riboni, Alessandro; Ruge-Murcia, Francesco (2008), The Dynamic (In)efficiency of Monetary Policy by Committee, Journal of Money, Credit and Banking, 40, 5, p. 1001-1032. http://dx.doi.org/10.1111/j.1538-4616.2008.00144.x

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Type

Article accepté pour publication ou publié

Date

2008-08

Journal name

Journal of Money, Credit and Banking

Volume

Number

Publisher

Wiley

Pages

1001-1032

Abstract (EN)

This paper develops a model where the value of the monetary policy instrument is selected by a heterogenous committee engaged in a dynamic voting game. Committee members differ in their institutional power, and in certain states of nature, they also differ in their preferred instrument value. Preference heterogeneity and concern for the future interact to generate decisions that are dynamically inefficient and inertial around the previously agreed instrument value. This model endogenously generates autocorrelation in the policy variable and helps explain the empirical observation that the distribution of actual interest rate changes has a mode of zero.

Subjects / Keywords

Interest rate smoothing; status-quo bias; policy conservatism; policy inertia; gridlock interval; dynamic voting

JEL

D7 - Analysis of Collective Decision-Making
E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
E4 - Money and Interest Rates